Majorities in both chambers of Congress strongly believe that the Affordable Care Act (ACA) is too prescriptive and moves too much authority over the health system to the federal government. If the Supreme Court rules in favor of the plaintiffs in the King v. Burwell case, Congress will have the opportunity to advance health care policies that expand consumer choice, increase coverage, deliver better value for the dollar, and allow state governments more say over health care policy.

Congress should do what it can to protect Americans in the affected states who signed up for coverage assuming the availability of subsidies while also making changes that would be real improvements over the ACA’s current rules and requirements.

A Targeted Response

An effective legislative response to a Supreme Court decision in favor of the plaintiffs in the pending cases would have four elements.

I. Short-Term Extension Of Modified Subsidies For Current Enrollees

A legislative response should begin with a short-term replacement of current subsidies in states using the federal exchanges with equivalent amounts under revised rules. This extension, which should last through 2015 at a minimum (and no longer than mid-2016 under any circumstances), would be necessary to implement steps 2 through 4. Congress might even consider enacting a short-term extension quickly to give it time to legislate those steps. Either way, the short-term extension should not extend subsidies to new enrollees in the exchanges. A bill with this short-term authorization of existing subsidies should also specify that reinstating the subsidies does not trigger the application of the individual and employer mandates in the affected states, and therefore, no penalties will be imposed or collected. (Note 1)

II. State Option for an Alternative Tax Credit Structure

Congress should grant states an additional option to providing insurance coverage to those without employer plans, using a revised formula for federal tax credits. There are two approaches to providing these credits that merit consideration:

Fixed Tax Credits by Age. For reasons of administrative feasibility and simplicity, the tax credits could be set initially as fixed-dollar amounts based on age. (Older people would get larger subsidies, reflecting their tendency to use health services more.) They should be sufficiently generous to ensure that anyone receiving them could purchase an affordable health insurance policy. These subsidies should be available to people who are ineligible for employer coverage (and thus ineligible for the tax benefit already attached to such plans).

Many different levels of tax credits could accomplish the goals of this proposal. One option would be to set the credits at $1,200 for nondependents under age 35; $2,100 for persons between 35 and 50 years old; and $3,000 for persons over age 50. In addition, households would get $900 per dependent child. (Note 2) Previous modeling indicates these credits would be sufficient to ensure a large percentage of the eligible population would be able to find and enroll in attractive insurance offerings.

Congress should consider whether these tax credits should be income-tested, as in the ACA. Income-testing would reduce the revenue impact of the subsidies that we estimate but also would make the credits harder to administer, make them less attractive to some consumers, and raise effective marginal tax rates.

Tax Credits Set as a Percentage of the Premium, Up to a Cap. If Congress is ready and able to achieve longer-lasting reform of health insurance subsidies, it should also consider matching the tax credits more closely to the varying costs of care and insurance that purchasers will face in the less-regulated markets ahead. This option would make the tax credit amounts more responsive to premiums that may vary by age and geography. Structuring the tax credits as a uniform fixed percentage of premium costs would provide all purchasers with the same subsidized discount rate in choosing insurance plans. This initial floating cost-based subsidy structure then could be adjusted in later years to set a ceiling on maximum tax benefits (to curb overspending) and add subsidies for more economically or medically vulnerable populations.

Under either option, the federal employer and individual mandates would remain inoperative, as should the federal definition of essential benefits and the federal age band restrictions. States electing this option would be given the authority to regulate the available insurance options according to state law and policy, but they should be encouraged to make those markets as competitive, accountable, and consumer-driven as possible.

III. Continuous Coverage Protection

Under this alternative system, states, rather than the federal government, would be in charge of regulating health insurance. There should be only one federal requirement: to qualify for the new federal tax credits, insurance policies offered in these states must be available to all who have maintained continuous insurance coverage (measured as three or fewer months without coverage over the preceding three-year period). (Note 3) Insurers would not be allowed to charge a higher premium to people who have been continuously insured and come to them with a preexisting health condition. Insurers would also be prevented from charging higher premiums to customers who subsequently develop serious health conditions and from imposing coverage restrictions tied to changes in a person’s health status. States would be free to regulate insurance offerings differently for those without continuous insurance enrollment.

This regulation extends to individual-market consumers the same kind of protections that HIPAA rules provide to those continuously covered in the employer group market. The ACA couples a broad prohibition on the use of health status in insurance decisions with the individual mandate. The protection we favor would apply to people who maintain continuous insurance coverage. That would create a strong incentive to stay covered (and the tax credit would provide the mechanism to stay covered) obviating the need for the individual mandate.

IV. Default Enrollment

State governments taking advantage of the new option should be allowed (but not required) to adopt default enrollment. If someone has not used his allotted tax credit to purchase health insurance, he would be enrolled (with advance notice) in a policy whose premium is equal to his forgone credit.

If the individual does not opt out upon receiving this notice, providers can use his insurance benefits to claim reimbursement for the care that they provide. This would effectively provide such a person with the benefits of catastrophic-level insurance coverage at no cost. State governments electing this option must invest in the infrastructure needed to minimize fraudulent insurance claims and ensure informed consent by default enrollees.

The Fixed Allotment Alternative

An alternative to this multipart reform program is a straightforward block grant or capped allotment to the states, with the states taking the lead on designing and implementing some kind of bridge in the aftermath of a Supreme Court decision.

State governments might find a capped allotment more attractive than federal tax credits because they would have even greater flexibility to implement a program of their choosing. Some members of Congress might prefer this approach because they could avoid some of the controversial or difficult policy choices that necessarily come with the design of a federal tax credit for health insurance.

On the other hand, it is not clear that allotment to states will necessarily result in a market-based reform plan. The Children’s Health Insurance Program is a flexible allotment program to the states, and it has not been a model of consumer-driven health care. Indeed, the program can best be described as an add-on to the traditional Medicaid structure in most states.

Further, individuals at risk of higher premiums or losing insurance policies in the aftermath of the Kingdecision might be more reassured by federal legislation that provides a new approach to providing assistance directly to them than by legislation that makes their continued coverage contingent on state governments’ decisions.

Budgetary Considerations

A court decision in favor of the plaintiffs in King would create an unusual budgetary situation. The Congressional Budget Office (CBO) projects federal spending based on current law; a court decision invalidating tens of billions of dollars in federal subsidy payments for health insurance would constitute a substantial change in law and thus also a substantial change in baseline spending estimates.

Legislation to temporarily extend the invalidated subsidies or to provide an alternative to the ACA’s structure would increase federal spending relative to an updated current-law baseline that assumes the invalidated subsidy payments will no longer be made. The revised baseline could prove to be an obstacle to consideration of a rational legislative response by Congress.

The budget plan Congress adopted this year recognized this potential problem and offers a partial way around it. For purposes of evaluating a potential legislative response to the King decision, the budget resolution allows the House to use baseline spending estimates issued by CBO in January 2015. This would allow consideration of a legislative response against a baseline that assumes continuation of the subsidy payments in all 50 states.

The workaround would not provide an unencumbered path to enactment of a new law. Statutory pay-as-you-go provisions enacted in 2010, aimed at ensuring all tax and entitlement legislation does not add to the federal budget deficit, cannot be overridden by a budget resolution and are enforced by the Office of Management and Budget in the executive branch. It is far from certain that the Obama administration would agree with a baseline adjustment adopted in Congress for purposes of enacting a post-Kinglegislative response.

For this and other reasons, it would be preferable for Congress to couple legislation providing renewed assistance for coverage with restraint of other federal spending. Among other things, Congress might consider eliminating some of the other spending approved in the ACA.

But it is important to be realistic about the political environment that would emerge in the wake of a decision for the plaintiffs in King. It is highly unlikely that the president and the Congress would allow several million people to lose substantial subsidization of their health insurance in a matter of weeks or months. One way or another, a legislative response will be necessary, and that may mean providing temporary subsidies without the offsetting spending reductions for some period of time.

An Opportunity for Progress

If the court rules for the plaintiffs in King, Congress will have the opportunity to partially address the many shortcomings of the ACA by giving states an alternative approach to providing secure and affordable insurance options. That alternative would be free of the mandates and most of the regulations that mark the ACA and would therefore result in lower premiums. But it would also be likely to yield coverage levels comparable to the ACA and offer protection for people with preexisting conditions.

For supporters of the ACA, congressional action along the lines advocated here ought to be more attractive than letting millions of people lose their subsides with no replacement. For ACA opponents, demonstrating that there are other ways to help people get the coverage they prefer, without the ACA’s mandates and regulations, ought to be more attractive than doing nothing because it will demonstrate that a viable alternative to the ACA is possible.

The broader public, we suspect, will also see this alternative as more attractive than doing nothing as well.

Editor’s note: This post is a modified version of a paper published by the American Enterprise Institute, with support from the Peter G. Peterson Foundation. The statements made and views expressed are solely the responsibility of the authors. Avik Roy is a paid adviser to former Texas Gov. Rick Perry, though Roy’s contributions to this article are his alone.

Note 1.

A ruling in the King case against the legality of federal tax credits for coverage in federal exchange states would create new risks for the Medicaid programs in those states that should be addressed in the same legislation providing a short-term extension of the existing subsidies. A careful reading of the ACA statute reveals that a proper definition of an “exchange established by the state” in King would also retrigger the ACA’s latent maintenance-of-effort (MOE) requirement for Medicaid programs in states without their own exchanges. State officials would be prohibited from changing the pre-March 2010 eligibility rules for Medicaid unless and until they establish a new ACA-compliant state exchange. Otherwise, they would risk forfeiture of all of their federal matching funds under Medicaid. Such a perpetual requirement is ill-advised, unilateral, coercive, and undoubtedly illegal, but overturning it in court—in line with the Supreme Court’s 2012 ruling in National Federation of Independent Business v. Sebelius—still would take several years. Congress should step in more quickly to repeal this MOE provision as part of its first legislative response to a court ruling for the petitioners in King.

Note 2.

Note 3.

States would be free to establish more flexible policies for providing this protection during the transition from the ACA’s structure to the new alternative regulatory approach. Additional federal funding for high-risk pools could provide some transition assistance for people who have not been in continuous coverage for a sufficient number of months at the time of the switch. States could also establish an “open season” to allow the uninsured to secure continuous coverage protection if they enroll in insurance during a specified period of time. High-risk pool funding could also be used to stabilize premiums for this population.